10 Types of Business Ownership (+Pros and Cons of Each)
Before starting a business, pick the best ownership model that fits your needs. Business ownership types are not created equal. They all have unique benefits and limitations that make them suitable for some situations and bad for others.
Are you better off as a sole owner, or do you want to share ownership rights with others? How do you want to pay your taxes? Are you open to sharing ownership with other partners?
Read on to learn the differences between different ownership styles and choose the best one for you.
Comparison of Different Business Ownership Styles (Winners & Losers)
|Business Control||Sole Proprietorship||Cooperative and C Corporation|
|Capital Investment||C Corporation||Sole Proprietorship|
|Taxation||S Corporation and Nonprofit Corporation||C Corporation|
|Limited Liability||All Types of Corporations and Limited Liability Companies (LLCs)||Sole Proprietorship and Partnership|
|Simplicity||Sole Proprietorship||C Corporation|
|Social Impact||Nonprofit Corporation and Benefit Corporation||All Other For-Profit Business Structures|
|Business Privacy||Sole Proprietorship, Private Corporation, and Close Corporation||C Corporation, S Corporation, and Benefit Corporation|
10 Common Types of Business Ownership for Starting Entrepreneurs
Business ownership is the structure that determines who owns an organization. Every business has at least one owner with the legal right to dictate how the company operates.
The ownership type you choose impacts how your business can run and what it can do. Your choice determines how much external funding your business gets from investors and tax deductions.
Do you know 51.4% of business owners in the United States of America (USA) are men, while 48.6% are women?
Here are 10 common forms of business ownership, including their benefits and limitations.
1. Sole Proprietorship. Perfect Ownership for Low-Risk Small Businesses.
A sole proprietorship is the simplest form of business owned by an individual. Many individuals use this legal structure because it is easier and cheaper to start than others.
Sole proprietors don’t require the approval of a director board or partner for any business-related decision. They can decide what happens to the business assets, hire and sack employees, and make all vital decisions.
Although it gives absolute power to the owner, a sole proprietorship has some disadvantages. It is not a separate legal entity, which means the owner is liable for business actions.
A court can order creditors to confiscate the owner’s personal assets if the sole proprietor fails to pay the debt.
A sole proprietorship records profits and losses on the owner’s personal tax return. The business does not pay tax, but the owner pays personal income tax on business profits.
There is no legal requirement for you to open a sole proprietorship. As soon as you start a small business, it falls under this category. However, you must register the business name if you want to use another name except for your legal one.
Depending on your locality and business type, you may need to get a license and any necessary permit.
Examples of sole proprietorships include:
- Independent contractors like freelance writers, digital marketers, web developers, graphic designers, business consultants, plumbers, and virtual assistants.
- Business owners such as fitness coaches and daycare operators.
Pros of Sole Proprietorships
- Easy to Set Up: Creating a sole proprietorship is relatively easy and cheap. The maximum requirement is to register your business name if you are not using your own.
- Pass-Through Taxation: The business profits and losses go directly to the owner’s personal tax returns. This tax structure prevents double taxation.
- Total Control Over the Business: The sole proprietor makes every major and minor decision. You can make decisions about running the business without permission from other owners.
- Easy Liquidation of Assets: If the sole proprietor dies, the next of kin will have no issues liquidating the business assets. There are no external partners to oppose the decision, which makes the process easy.
Cons of Sole Proprietorships
- High Legal Risks: The sole proprietor has to answer any lawsuit against the business because the law recognizes the business and the owner as a single entity. This can lead to the loss of personal assets.
- Difficulty in Raising Funds: Sole proprietors face challenges raising funds and obtaining loans. Thankfully, small business loans without credit checks offer sole proprietorship funding with fair interest rates.
- Difficult in Selling the Business: Selling a sole proprietorship is hard. In most cases, the business is usually small and has few assets, which makes it less attractive to potential buyers.
- Business Death after Owner’s Demise: If the owner dies, the business may quickly follow suit, except there is a succession plan.
2. Partnership. Best Ownership for Business Partners.
A partnership is a business collaboration involving two or more owners. There is no partnership with one person in the picture. This business entity supports up to 100 owners.
Every individual partner signs a partnership agreement to make the business official. This document contains every necessary detail: the partner's rights, shares, capital contribution, and individual responsibilities.
Examples of businesses that often operate as partnerships include law, accounting, and real estate investment firms.
There are three types of partnership: general partnership, limited liability partnership, and unlimited liability partnership.
- General partnership is a business ownership type where two or more partners share responsibilities for all business activities. The general partners actively manage the daily affairs of the business and are liable for the business actions of every partner.
- Limited Liability Partnership: This type of partnership prevents other partners from losing their assets because of another partner’s actions. In other words, if someone sues a partner for debt, other partners’ assets can not be part of the settlement.
- Unlimited Liability Partnership: This partnership has an unlimited personal liability, where every partner is responsible for the business actions. If the company owes debt beyond what it can pay, every partner can lose personal assets.
Pros of Partnerships
- Access to Partners Knowledge: Remember the famous adage “two heads are better than one?” Now imagine the contributions three or more partners can add to a partnership.
- Easy to Set Up and Run: Don't let the term partnership give you a complex view of the business structure. Setting up and running the day-to-day operations of a general partnership is easy. The requirements are registering your business name and signing a partnership agreement.
- Better Fundraising Capacity: Raising capital among partners is a viable way to generate funding for business operations. Every partner contributes financially to keep the business running.
- Division of Labour: In a general partnership, every partner participates in day-to-day business operations, while in a limited partnership, they do not.
Cons of Partnerships
- Unlimited Liability: In a general partnership, every partner gets affected by the losses or liabilities of the organization. It doesn't matter who caused it; they all share the business liabilities.
- Lack of Autonomy: Since the business belongs to more than one person, every major decision needs the approval of every partner. For example, if the partner in charge of marketing wants to run a new campaign, every partner has to agree.
- Potential Conflicts: Since it involves multiple partners, conflicts can arise when partners disagree on vital decisions.
3. Limited Liability Company. A Perfect Type of Ownership for High-Risk Small Businesses.
A limited liability company combines the best features of a sole proprietorship and a corporation. Owners get the flexibility and pass-through taxation benefits of a sole proprietorship or partnership and the liability benefits of a corporation.
This business ownership style is ideal for small businesses with significant risks. It is easier and cheaper to form than a corporation while offering the same liability protection. If your company goes bankrupt or gets hit by a lawsuit, your assets do not contribute to any settlement.
However, liability protection doesn’t cover situations where your personal negligence causes the business to lose or affect another party.
- LLC owners are liable if they personally serve as a guarantor for a business loan and the company fails to pay.
- If they engage in fraudulent or illegal activities through the LLC.
An LLC offers the flexibility to choose how you want to pay taxes. Like sole proprietorship, the company’s profits and losses pass directly to owners, and they file them in their personal income tax returns. In addition, owners can choose to pay corporate taxes like a corporation.
LLCs, using the default pass-through taxation, pay their owners through profit distribution. But for those that use the tax system of a corporation, owners get a fixed salary.
To register an LLC, you must have at least one owner. There is no limit to the number of owners that can form an LLC. However, if you choose the tax structure of an S-corporation, you can have no more than 100 members.
The most important legal documents for forming an LLC are articles of organization and operating agreement.
Examples of well-known limited liability companies include Sony, Blackberry, Anheuser-Busch, Domino's, and Nike.
Pros of Limited Liability Companies
- Limited Liability: Shareholders can’t be held personally liable for the LLC’s actions because the law recognizes it as a separate legal entity. In the event of a lawsuit, only business assets can form a part of the settlement.
- Tax Options: LLC makes it possible for the owners to choose how they want to pay taxes. Owners can decide their tax status, either through pass-through taxation or directly as a corporation.
- Credibility: Unlike sole proprietorship and general partnership, an LLC is a business entity that separates the owner from the company. This characteristic makes the LLC look more reliable to consumers and investors.
- Simplicity: An LLC is easy and less expensive to form compared to a corporation but more complex than a sole proprietorship. Maintaining an LLC is simple, and there is no requirement for you to set up a board of directors.
Cons of Limited Liability Companies
- Difficulty in Raising Capital: Raising funds from external investors can be a struggle as an LLC, as it does not offer stock options like a corporation.
- Limit to Personal Liability Protection: Although an LLC offers its members liability protection, it does not protect them from the consequences of their actions in a lawsuit.
4. Private Corporation. Type of Ownership for Large Family-Owned Companies.
A private corporation is a unique business ownership type owned by a small number of shareholders. Shares are not open to the general public. You can’t trade its shares on any public stock exchange. Only a select group of shareholders can own and exchange shares.
This type of corporation is suitable for large family-owned businesses. Examples of companies that use this ownership style include Koch Industries, Deloitte, Cargill, and Albertsons.
A privately held corporation is not under any obligation to disclose its financial information to the general public. It doesn’t have to file its financial reports with the Securities and Exchange Commission (SEC).
Different countries have limits on how many shareholders a private corporation can have. In the United States, the maximum number of shareholders is 2,000.
In Australia, the maximum is fifty (50) non-employee shareholders. The number of shareholders can be more than 50 if you have employees owning shares in the corporation.
Starting a private company requires articles of incorporation. Here, you state your shareholders’ names and the number of shares they own.
Pros of Private Corporations
- Financial Privacy: A private corporation doesn’t have to release finance details to the general public. If it makes a huge profit or loss, it can keep its records in-house.
- Fast Decision Making: With a small number of shareholders, it is easier to make business decisions.
- Limited Liability: This business ownership protects stakeholders' assets from being seized if the company experiences a loss.
- Exchange of Shares: In privately held companies, only internal shareholders can own, buy, and sell shares. This structure is ideal for family-owned businesses that want to keep ownership within the family.
Cons of Private Corporations
- Long Registration Process: Registering a privately held company is expensive and takes longer to set up than a sole proprietorship and a partnership. A verbal agreement is not sufficient to establish a private corporation. You have to submit the articles of incorporation in the state the company operates.
- Fundraising Restriction: Owners can’t sell shares to the public to raise funds. This restriction can affect the growth of the company.
5. Nonprofit Corporation. Best Business Ownership for Nonprofits.
A nonprofit corporation is a non-ownership structure formed to serve society. Unlike other businesses, its primary objective is not to make profits but to serve the public good.
Even when it makes profits, it reinvests it in its mission. Examples of nonprofit corporations include charitable, scientific, educational, religious, health, animal, human rights, and cruelty-prevention organizations.
Breakdown of Categories for Nonprofit Organizations
The most striking advantage of the nonprofit corporation is that it enjoys tax-exempt status.
Because of its unique structure, nobody can own a nonprofit corporation. But what about the people who start it? They have no ownership but can be a part of the board of directors or trustees running the nonprofit.
However, it is illegal for the board of directors to run the nonprofit in a way that generates profits for individuals. The nonprofit is accountable to the general public, government agencies, and the country’s tax body.
Setting up a nonprofit organization requires registering a name, forming a board of directors, filing articles of incorporation, and applying for tax-exempt status.
Examples of nonprofit organizations include The Bill and Melinda Gates Foundation, Habitat for Humanity, Red Cross, and Amnesty International.
Pros of Nonprofit Corporations
- Limited Liability Protection: The nonprofit is a separate legal entity from its founders. They enjoy personal liability protection from the nonprofit’s actions.
- Tax Exemption: Nonprofits can get a tax exemption status from the government. This tax classification prevents them from paying any tax.
- Grant Eligibility: Nonprofits carry out charity work and are eligible to apply for grants from various organizations, private sponsors, and governments.
Cons of Nonprofit Corporations
- Lots of Paperwork: Starting a nonprofit corporation requires you to fill in too much paperwork. The board of directors also has to keep annual records.
- Limited Activities: A nonprofit corporation can only focus on not-for-profit activities. Membership of the board of directors is usually voluntary. However, members can deduct expenses incurred while carrying out their duties. Some nonprofit corporations may pay their board members, but the paid individuals can lose the protection offered by nonprofits.
- Limited Access to Funding: Getting funds to execute vital projects can be a challenge. A nonprofit corporation primarily relies on grants and charitable contributions from individuals.
6. Benefit Corporations. Best Ownership Type for Social Entrepreneurs.
A benefit corporation combines the benefits of nonprofit and profit-oriented organizations. This ownership style focuses on making positive social impacts while making profits.
Entrepreneurs who want to make social and economic impacts find this ownership style the most suitable. An example of a social entrepreneur is Blake Mycoskie, founder of TOMS Shoes. For every pair of shoes the company sells, it donates a pair.
The same as a typical corporation, it has shareholders and a board of directors running its affairs. However, while the corporation focuses exclusively on making profits for its shareholders, it places equal attention on promoting the public good.
A benefit corp doesn’t enjoy tax exemptions like a nonprofit. It can choose to subject itself to a corporate income tax like a C corp or not pay it like an S corp.
There is no limit to the number of shareholders a benefit corporation can have. However, if it uses an S corp tax status, it can only have a minimum of 100 shareholders.
The rules for forming a benefit corp vary by state. You need to file articles of incorporation stating its general benefit goal. Some states may require you to publish annual reports accessed by a third party to prove you are true to your social impact goals.
Another way to form this business ownership type is to get your existing corporation certified as a B corp. The requirements are stringent. You have to take a B Lab Impact Assessment every 3 years and pay B Lab fees ranging from $500 to $50,000 annually.
Examples of well-known benefit corporations include Patagonia, Plum Organics, King Arthur Flour Company, and Kickstarter.
Pros of Benefit Corporations
- Social Impact: This ownership structure is attractive for many business owners because it allows them to make profits and contribute to the public good.
- Attracts Investors: Benefit corps attract investments from people who want to earn a profit and make a social impact.
- Profit Distribution: Every shareholder is liable to receive a part of the organization's profits as dividends.
- Limited Liability: Shareholders are not personally liable for any legal claims or losses the business incurs.
Cons of Benefit Corporations
- Expansive Reporting Requirements: A B corp tenders its financial and social impact reports to stakeholders and regulatory bodies annually.
- Expensive to Run: Your corporation has to pass an evaluation process to become a benefit corp. However, if you want to turn an existing corporation into a B corp, you must pay a yearly fee. The annual certification fee ranges from $500 to $50,000 annually.
- Tax Requirement: Unlike a nonprofit, a benefit corp pays taxes for doing social impact work. Since it is a for-profit organization, it does not enjoy a tax-free status.
7. Close Corporation. Suitable for Small Family-Owned Businesses.
A close corporation is owned and run by a select number of shareholders that share close business ties. It can operate as a partnership where shareholders and directors play an active role in the daily management of the corporation.
Like a private corp, the close corporation can’t publicly trade its shares. Only its members at incorporation can buy and exchange shares.
A close corporation is free from the requirements of publicly-traded organizations. It does not need to create a board of directors, submit annual reports, and hold yearly shareholders meetings.
Small family-owned businesses use this structure to keep ownership within close family ties and escape the operational requirements of a corporation.
State statutes govern the activities of close corporations. Some states do not recognize it. Requirements for close corps vary from one state to another. For example, Arizona allows up to 10 owners, while California supports up to 35.
The basic requirements for setting up a close corp are a written shareholder agreement and certificate of incorporation.
Examples of close corporations include Deloitte, H-E-B, Publix Super Markets, and PricewaterhouseCoopers (PwC).
Pros of Close Corporations
- Operational Flexibility: A close corp has fewer rules to follow. Apart from following the written shareholder agreement, owners can run the corporation without complying with strict corporate regulations.
- Limited Liability Protection: Like a typical corporation, shareholders enjoy liability protection from the company’s debts.
- Freedom from Outside Pressure: This corporation is strictly exclusive to a select group, preventing pressure from external shareholders.
- Easier Decision-Making: Business owners in a close corporation enjoy more freedom over their operations. They can make business decisions such as buying new equipment without seeking the board of directors’ approval.
Cons of Close Corporations
- Not Widely Recognized: Some states do not allow the formation of close corporations.
- Taxation: Close corporations are subject to double taxation. However, you can get an S corp tax status to prevent this problem. Also, many close corps don’t pay members dividends to avoid double taxation.
- Restricted Capital: The capital needed to run a close corporation comes from its owners. Since you can’t publicly sell shares to raise funds, it may limit your ability to expand as a corporation.
8. C Corporation. Best Ownership Style for Raising Business Capital.
A C corp is a publicly traded company that can accommodate unlimited shareholders. Owners can sell their shares on a publicly-traded stock exchange to generate more business funds. C corp is the best option for attracting investors and business capital.
A C corporation taxes shareholders separately from the company. It pays income tax on its corporate profits. Shareholders also pay personal income tax on their dividends. Top companies like Microsoft and Walmart use the C corp designation for federal income tax purposes.
Like other corporation types, a C corp provides shareholders with personal liability protection from business debts and lawsuits. In the event of bankruptcy or debts, shareholders’ assets are untouchable.
Forming a C corp involves:
- Filling out an article of incorporation document in your state.
- Appointing a board of directors.
- Drafting the company’s bylaws.
Pros of C Corporations
- Access to Funds: A C corporation raises money by selling stock to individuals, companies, and other organizations.
- Limited Liability: Shareholders are not liable for the corporation’s legal obligations. They enjoy protection on their assets if the company faces a lawsuit or has to pay the business debt.
- Tax Advantages: This corporation qualifies for many tax advantages, such as personnel and rent tax deductions. The deductions can apply to wages, health, and retirement benefits.
Cons of C Corporations
- Double Taxation: C corps pay income tax at the federal and state levels on its earnings. Shareholders also have to pay personal income tax on the dividends paid by the corporation. You can escape this problem by reinvesting dividends into the company.
- High Setup and Running Cost: Running and maintaining a C corporation is not cheap. Corporations are generally expensive to form and run. The average cost of creating a C corporation is around $633. This estimation covers one-time accounting and legal fees.
9. S Corporation. Best Ownership for Small Businesses with Complex Operations.
An S corporation passes its profits and losses directly to its shareholders for tax purposes. It got its name from the Subchapter S of the Internal Revenue Code.
S corp can't have more than 100 shareholders. It can only offer shares to individuals, trusts, and specific tax-exempt organizations. Corporations and partnerships cannot own their shares.
S corps are attractive to small business owners who want to enjoy the benefit of a corporation but want to escape its double taxation. The company does not pay federal and state income taxes. Instead, shareholders pay personal income taxes on their dividends.
Setting up an S corporation requires you to choose a business name, file articles of incorporation, and S-Corp election paperwork with the IRS.
Pros of S Corporations
- No Double Taxation: Unlike other stock corporations, an S corp does not pay corporate income taxes. However, the IRS mandates that it pays shareholders a reasonable salary even when it doesn’t record a profit. Owners pay personal income tax on their earnings.
- Limited Liability: Shareholders, directors, and employers enjoy personal liability protection from the corporation’s debts and actions. If creditors sue the corporation, owners’ personal assets have protection.
Cons of S Corporations
- Limited to Issuing Common Stock: A S corp can only issue common stock that gives shareholders voting powers and ownership rights. It can’t have more than 100 shareholders. This limit can affect its fundraising ability.
- Expensive to Startup: S corporations are costly to start up and maintain effectively. If you want to start this business ownership, be ready to invest significantly.
10. Cooperative. Best for Individuals and Businesses with Similar Interests.
A cooperative is a privately-owned organization of like-minded business owners that pool resources together for its members’ advantage.
Other business structures allow owners to own a part without using its products. However, with a cooperative, members are its primary customers.
A cooperative is run like a democratic society. Every member actively participates in the decision-making process. They elect officers and members of the board of directors.
Business owners create cooperatives to reduce costs through bulk buys and sharing employees and wages.
Cooperatives can accommodate an unlimited number of shareholders. The minimum number of members it can have varies by country and business type.
Because of its many members, it appoints a board of directors to directly manage its day-to-day running.
A cooperative pays tax like other for-profit business owners but enjoys special tax treatment. It can pay its members patronage dividends to lower its taxable income.
Examples of cooperatives include Sunkist, Ocean Spray, Cabot Creamery, The Associated Press, Home Hardware, and Associated Wholesale Grocers.
Pros of Cooperatives
- Unity Among Members: Members of a cooperative are united for a common goal. The projects it wants to achieve serve as an anchor that brings all the members as one.
- Access to Funding: Raising funds and capital to execute projects comes relatively easy. They can raise funds via member contributions and investments. The organization is also liable to receive grants and can house an unlimited number of shareholders.
- Lower Corporate Tax: A cooperative can get special deductions for expenses. Also, the money it pays members as part of their benefits is free from corporate tax.
Cons of Cooperatives
- Bureaucracy in Decision-making: Coming to a consensus about decisions is not a walk in the park with cooperatives. Due to multiple shareholders, it's not always possible to have a general agreement.
- Corruption: If the leaders are corrupt, funds will get misused, resulting in losses for shareholders.
Choose The Best Ownership Type For Your Business
Before choosing the best ownership type for your business, consider the benefits and disadvantages of different options. You have to consider the following factors:
- Vision: What are your long-term business goals?
- Mission: What is your business purpose?
- Size: How many partners or shareholders would you be willing to work with?
- Expansion Plans: How large or quick do you intend to expand, and what locations do you have in mind?
- Funds: How do you intend to fund your business?
Answer these questions before making a decision. If you are still having difficulties, consult an attorney for help. However, note that hiring an established business lawyer is costly.
Luckily, there are reliable online legal service providers to help you pick suitable business ownership. In addition, you can get legal assistance to properly file your taxes and set up your business entity.
If you want to learn more about starting and running a profitable new business, here are other Founderjar articles that can help.
- 5 Common Types of Business Structures (+ Pros & Cons)
- 13 Best Countries to Start a Business
- How to Write a Business Plan in 9 Steps (+ Template and Examples)
- The Best Tools to Start Your Online Business
- 12 Key Elements of a Business Plan
- How to Start a Consulting Business in 2023
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